Assignment 1

Question 1

Six Methods used to determine executive status in an organization

Answer 1

1) Salary
2) Job Grade
3) Key Position
4) Job Title
5) Reporting Relationship
6) Combination

Question 2

Salary used to determine executive status

Answer 2

A simple, direct way of establishing as an executive. Problems include its reliance on specific definable limits or cutoff points on the eligigbility; considerable pressure exerted to move people above the eligible salary level; and adjustments of salary cutoff points required annually to prevent an increasing number of employees from qualfiying as executives.

Question 3

Job grade used to determine executive status

Answer 3

Rationale is simple: the value of the job to the organization was already determined when each job was placed in a job grade. May be superior to the use of salary because it relates to the content of the individual’s job, but it can be misleading because it places similar pressure to upgrade positions into the eligible group

Question 4

Key position used to determine executive status

Answer 4

Look at the posistion and determine whether its job content is appropriate. 2 problems with this approach: jobs in the same job group may be treated differently, and this approach needs to have frequent job reviews for additions and deletions for eligibilty purposes. More popular with smaller organizations

Question 5

Job title used to determine executive status

Answer 5

Problem with determining who is an executive by job title is that a lower-level vice president may have fewer responsibilities than the highest-level director

Question 6

Reporting relationship used to determine executive status

Answer 6

While reporting relationships can be used to determine executive status, there is a problem with the inclusion of “executive assistants” and “assistant to” whose degree of importance to the organizaiton might be better represented by their job grade than their organizational level

Question 7

Combinations used to determine executive status

Answer 7

Some organizations use a combination of the previously described approaches to determine executive status. Because each of the previous 5 approaches have advantages and disadvantages or shortcomings, often combinations of 2 or more of them are used to determine executive status.

Question 8

How many employees in an organization are considered to be executives?

Answer 8

2 rough guidelines:
those individuals in the highest paid 2% or 3% or a company’s total workforce or those in the highest paid 5% of the exempt portion of that workforce.

These percentages need to be adjusted down in centralized organizaitons and up in decentralized, becase in decentralized the ability to decide is pushed down in the organization.

Question 9

% of executives in a capital-intensive organization versus a people-intensive

Answer 9

Might expect a higher % of executives in a capital intensive org than a people-intensive org because equipment rather than people dominate the lower levels of a capital-intensive org. In people-intensive, decision making has to be pushed farther down in the org, to prevent the company from becoming an inefficient bureaucracy.

Question 10

The fewest number of executives can be found in

Answer 10

centralized, people-intensive organizations where all major decisions are made by a small numbner of top executives.

Question 11

Extrinsic versus intrinsic compensation

Answer 11

Pay if a form of extrincic compensation.
Work environment, type of work, learning developmentasl opportunities, autonomy and power and the extent of recogintion are intrisic or “psychic” compensation
Successful organization provide both. Intrinsic comp adds to the retention capability of direct pay.

Question 12

5 Basic Compensation Elements in an Organizaiton

Answer 12

1) Salary
3) Employee Benefits
3) Short-term incentives
4) Long term incentives
5) Perquisites

For most employees only salary and employee benefits are a factor, but all 5 are present at the cheif executive officer leverl. they are phased in at different levels of employment in the organization

Question 13

Salary

Answer 13

Salary should reflect an individual’s expierence and level of job performance. Basically, salary is a no-risk form of pay to the executive because it is rarely, if ever, reduced. An executive’s base pay allows them to meet some of his or her lifestyle objectives.

Question 14

Employee Benefits

Answer 14

Employee benefits meet many needs that employees would otherwise have to pay for from their own disposable income such as retirement and health care coverage.

Years of service and/or level of pay typically determine the extent of coverage, and a group basic employee benefit package generally is provided to all employees in an organization.

Question 15

Perequisites

Answer 15

A key component of executive compensation. These are special priviliges tailored exclusively for executive employees rather than rank-and-file ees

Question 16

Short Term Incentives

Answer 16

Designed to include both the downside risk and upside potential, short term incentives reward achievement of a short-term target, normally occuring within one year. Typically the amount of pay varies in relation to performance, thereby lowering cost to the organization when performance is low. These can be group or individual in nature and should be clearly tied to annual business target

Question 17

Long Term Incentives

Answer 17

Cover a performance period beyond one year. Normally, there is no individual performance component in long-term incentives, only group or unit. The executive has a portion of pay placed at risk with degree to attainement of business objective.

Failure to meet the expected traget results in no payment or low payment for long-tem incentives. the multi-year nature of long-term incentives provides some holding power over the executive if the payout will be signifigantly later on.

typically, pay is based on shareholder value and/or financial performance of the defined unit. ( entire company, or sector)

Some form of stock compensation is often used with long-term incentives

Question 18

At higher levels of compensation

Answer 18

decreasing emphasis is applied to salary and benefits, whereas an increasing emphasis is given to short-term incentives, long term incentives and perquisites. The reason is that it is more advantagous to the company to relate reward to performance.

Question 19

Factors that impact the design of an executive pay program

Answer 19

1) Stakeholders and rulemakers
2) Board of Directors
3) Compensation Elements
4) Performance Measurements and Standards
5) Strategic Thinking
6) Market lifecycle
7) Structural organization change
8) Type of company

Question 20

Not-for profit company

Answer 20

Receive favorable tax treatment after qualifying under the Internal Revenue Code. Because of their nonprofit status they must be sure to avoid any signifigant residue after paying all their expenses or risk careful scrunity by the IRS. Lacking a profit incentive removes many of the short and long term incentive opportunities

Question 21

Publicly held companies

Answer 21

Those that are required by the Securities Exchange Act of 1934 to register their securities becuase of an offering to the public.

Question 22

Threshold Stage in the market lifecycle

Answer 22

1) Company has a limited range of closly related products, and distribution may be primarily in a regional area
2) The company may have attained a posistion of dominance in a small industry, and managers are exploring new markets for products
3) Decisions are made by individuals, and there are few, if any, policies and procedures
4) Relative duties and responsibilities of individuals are not clearly identified, and there is a high degree of overlap in apparent responsibilities among a number of jobs
5) The tone is casual with everyone on a first name basis, and the dress code emphasizes comfort rather than apperance
6) Survival of the products has the full attention of everyone
7) Cash is scare, and cash-fllow problems periodically occur, with management often deferring its own salary payments to ease the crunch
8) It is a time of high risk in order to survive, increased sales and suffiencent cash flow to meet the needs are key factors

Question 23

Growth Stage in the market lifecycle

Answer 23

1) This is a time of tremendous growth as the threshhold company emerges with strong success in new venture areas as well as becoming a national influence by challenging established leaders in market share
2) An expansion of product lines has incresed diversity and complexity of related management processes
3) The number of employees increases along with sales, and management may shift from original owners into the hands of professional managers, as the company must cope with different problems brough on by apparent success
4) Coordination needs are greater and communication more formalized to ensure consistnet interpretation
5) Relative priorities need major review
6) Return on shareholder equity is very strong and incresing signifignatly during this phase
7) The company is likely to state its nature of business too broadly, venturing into product lines for which it lacks expierence
8) Written policies and procedures start to ermerge. Decision making has become more formalized and alternatives are viewed in light of precedents set during the threshhold stage

Question 24

Maturity Stage in the market lifecycle

Answer 24

1) There is little change in market position
2) Emphasis is probably on maintaining current market penetration and servicing exisisting customers rather than adding new customers
3) Market share is likely to be gained by lowering prices then increasing investment
4) Administrative expenses become an increasing % of total costs as productivty improvements chip away at direct expenses
5) Staff functions are increasing faaster than the reduction in direct labor
6) Reducing costs is important, especially if sales revenues have flattened out
7) Corporate policies and position descriptions have been written to cover the full gambit of business issues, and an extensive finacial recordkeeping system has been developed.
8) Companies often undergo a consolidation whereby they trim their managment ranks and narrow their marketing focus- usually focused on their high-profit product lines in a more concentrated area

Question 25

Decline Phase in the market life cycle

Answer 25

1) Market share is falling and/or the market itself is disapperaring because of technological obsolescence
2) Cost-improvement programs take on strong importance
3) The need to develop new products or find a new market for existing products is now critical, and the focus in on survival
4) Procedural manuals exist on almost every topic, form has become more important than substance, committment to the process has replaced committment to the results and bureacracy rules
5) Embeddecd costs are high but, paradoxically, cash is more likely to be avaialbe during this phase than most others, because of cutbacks in reserach and marketing expenses or the sale of part of the business
6) Most companies will be forced to diversify
7) The company is trying to reinvent itself by applying its expertise, shifting itself back to a growth phase

Question 26

Market Cycle

Answer 26

the market cycle of a company is simply a consolidation of its products and where they are in their respective market cycles. by the same logic a company can be described by stage of lifecycle. A product could be in a growth phase while the market for such a product is in decline

Question 27

Demise of a firm

Answer 27

There are many internal and external problems that can result in the demise of a firm. Poor management or poor workforces, increasing costs and decreasing prices are internal problems that can destroy a company. External problems such as new competition, new technology, or changing markets can result in a collapse of a firm

Question 28

Events that can occur in the various stages of the lifecycle of a company

Answer 28

1) remain
2) advance
3) sellout
4) turnaround
5) bankruptcy

Question 29

Initial Public Offering

Answer 29

Once a company decides to undertake an initial public offering, it must select an underwriter. After analyzing the company’s finacial data, and comparing them with rivals, the underwriter sets a preliminary value for the company, which leads to setting a preliminary stock price. After the company afrees with initial stock price range, meetings are set up with instifutional investors to get an indicaiton of interest. Based on this interest the underwriter sets the final initial public offering price the day before trading is to begin.
A prospectus, filled with financial data as well as speical risks and how the company intends to use the money is prepared for filing with the SEC

Question 30

Merger versus Acquistion

Answer 30

a merger is the joining together of 2 companies to form a new organization; whereas in an acquisition one company clearly buys out the other.

acquistions are easier to finance if the acquiere’s stock has been on the asent and the stock of the company being acquired has been dropping. However, the latter is likely to be quickly reversed by speculative investors

In a merger, it may be appropriate to design a new pay structure. With an acquistion, the issue is whether to bring employees inot the acquirer’s programs or permit them to continue with their current plan.

Question 31

Joint Venture

Answer 31

When 2 companies have different complementary strengths, it may be appropriate to set up a joint venture whereby the 2 companies form a 3rd either with each owning half or with one having a majority stake.

The new organization is staffed with individuals from both organizations, and one of the requirements will be to set up an executive compensation program.

Another issue that needs to be addressed is what happens to the pay plans when the joint venture is dissolved. Exit strategies should be agreed upon at the time of formation, not at the time of dissolution.

Question 32

Alliance

Answer 32

An alliance is a formal contractual agreement between companies specifying respective responsibilities over a period of time without forming a new company. They are formed to increase and/or reduce cost. Alliance are less costly than mergers or acquistions and can be just as successful in many situations.

Because the organizational structure of neither company has been altered, there is little effect on executive pay plans.

Alliances must be reviewed regularly to ensure they are appropriate and properly aligned with organizational needs. Exit strategies identifying when and how companies will end the relationship is essential.

Question 33

Spin-off

Answer 33

In a spin-off, the divested business is given- not sold- to existing shareholders. This is done by creating a new stock.

A key difference between a spin-off and an initial public offering is that in an initial public offering, stock is sold to new stockholders

Question 34

Various components of the strategic-thinking process

Answer 34

1) Vision- The vision is the expected future for the firm. It is what one expects for the role of the organization in the future.
2) Mission- The mission is how one acheives the vision- that is, it fills in the gap between the now and the vision
3) Core competencies- What the company is good at doing can be considered as the core competencies. They must align with the mission and vision of the company
4) Objectives and goals- The mission is further refined in terms of qualitative targets or objectives. The objectives are broken down into quantittative targets or goals. Some reverse the terms, calling the goals the qualitative and the objectives the quantitative.
5) Threats and opportunities- Goals may be easier or more difficult to attain based on perceived threats and opportunities identified by an envrionment scan of not only what is happening, but what is likely to occur. The threats and opportunities are broken down into areas such as the economy, business, law, and culture.